Global funds accelerate their exit from Asia, with weekly sell-offs reaching $11 billion, marking a four-year high.

Global capital is withdrawing from Asian emerging market stocks at the fastest pace in nearly four years. WallstreetCN previously published an article, noting that markets like Japan and South Korea heavily depend on Middle Eastern oil imports, the escalation of the Iran conflict has triggered risk aversion, forcing investors to reprice risks, rapidly impacting both stock and currency markets.

According to Bloomberg data, global funds have net sold about $11 billion worth of developing Asia stocks excluding mainland China this week, set to mark the largest weekly outflow since March 2022. Among these, South Korea saw about $1.6 billion, India about $1.3 billion.

Capital outflows combined with a sharp drop in risk appetite have sparked a rapid decline in regional stock markets. The MSCI Asia Pacific Index has fallen more than 6% this week, set to record its largest weekly drop in nearly six years, and has posted its largest underperformance relative to the S&P 500 since April. South Korea's Kospi Index saw a record single-day decline, and some markets experienced multiple trading halts.

Morgan Stanley strategists, citing Iran war-related risks, have taken a more cautious stance on Asian and emerging market stocks, downgrading India and UAE from overweight to neutral, saying Asia is "heavily reliant on Middle Eastern crude oil, refined products and LNG supply," believing the market is underestimating supply chain risk.

The “Sell America, Buy Asia” Trade Reverses; Risk Reassessment Becomes the Main Narrative

This latest outflow marks the reversal of a recent high-yield trade: "Sell America, Buy Asia." This strategy bet on a weaker U.S. dollar, moderate inflation, and the AI boom boosting regional chip stocks, rotating funds from highly valued U.S. stocks to Asian stocks.

But the Iran situation has shaken this key premise. Allspring Global Investments fund manager Gary Tan said investors previously bought Asian stocks based on expectations of a weaker dollar and benign inflation, but the Iran situation challenges both assumptions; the market is reassessing the likelihood of a sustained strong dollar and whether high oil prices will reignite inflation pressure.

Oil Price Sensitivity Rises: Asia’s Dependence on Middle East Energy Supply Repriced

A deeper pullback in Asian assets stems from their relatively high dependence on Middle Eastern crude. A large share of fuel imports must pass through the critical Strait of Hormuz; escalation of conflict increases supply chain risk premiums. Rising crude prices have aggravated worries about resurgent inflation, especially as many central banks are just beginning to gain confidence in cooling inflation.

Japan, South Korea, India, Indonesia and other economies rank among the world's largest crude importers, while the U.S. has already become a net crude exporter. This divergence reinforces the market's view that Asia, as a "net importing region," is more vulnerable to inflation and policy constraints when oil prices surge.

Stocks and Currencies Drop Together; Volatility and Deleveraging Fears Rise

Risk aversion trades have strengthened the dollar and suppressed emerging market currencies, with particular focus on net oil importing countries’ currencies and their impact on domestic inflation. The Korean won posted its largest single-day closing drop since 2009 on Tuesday; investors are wary of forced deleveraging and liquidation risks.

Meanwhile, volatility indicators are rising. The JPMorgan Emerging Market FX volatility index this week rose above the G7 comparable index level, ending a record-setting stretch of "lower than G7," highlighting how risk pricing is switching rapidly.

Institutional Positioning: Morgan Stanley Turns Defensive, Citi Awaits Stable Signals

Strategically, Morgan Stanley strategists, citing Iran war risk, have taken a more cautious position on Asian and emerging market stocks, downgrading India and UAE from overweight to neutral, and Saudi Arabia from underweight to neutral.

Daniel Blake, Jonathan Garner and others wrote in their report, "We remain defensive," and said Asia "heavily depends on Middle Eastern crude oil, refined products and LNG supply," believing markets underestimate supply chain risk.

Citi highlights timing management. Luis Costa and others wrote in their report that risk exposure has already been significantly reduced in the past few days, but if signs of stability emerge, they would like to reestablish long positions in emerging markets; although oil prices show "preliminary signs of stabilization," it is still too early to say oil will repeat its 2022 trend.

Beyond the Middle East situation, investors will also focus on tonight’s U.S. nonfarm payroll data for clues to the Federal Reserve’s interest rate path. The repricing of dollar strength and global risk appetite may still determine whether this round of "exit trades" from Asian assets is a temporary fluctuation or a more lasting rebalancing of positions.

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